Current trends in the Philippine mining and energy sectors

October 2018  |  SPECIAL REPORT: ENERGY & NATURAL RESOURCES

Financier Worldwide Magazine

October 2018 Issue

The Philippines’ relatively small geographical area belies its potential for growth in mining and energy. Various sources, from the US State Department to different international publications, recognise its immense untapped mining potential, in particular. Based on the policy brief of the Philippine Senate Economic Planning Office, the country is said to contain approximately $840bn of untapped mineral wealth.

The mining industry is a growing contributor to the Philippine economy. Based on the mining industry statistics released by the Philippine Mines and Geosciences Bureau, the gross production value of the first quarter of 2018 – Php109.5bn – surpassed the gross production value of the entire previous year – Php108.6bn. In addition to its significant contribution to the economy, the mining industry also opens up a host of employment opportunities to its stakeholder-communities. As of 2016, at least 236,000 workers (excluding indirect jobs generated by upstream and downstream sectors) were employed in the mining industry. Indirectly, mining companies have also positively impacted the development of their stakeholder-communities. As of August 2016, approximately Php13.153bn has been allocated by mining companies for the development of their host and neighbouring communities through approved social development and management programmes.

Notwithstanding this, many factors continue to impede growth, primarily the issues of responsible or sustainable mining and the perceived negative environmental effects of mining.

The apparent lack of responsible mining practices and its negative environmental effects led then-president Benigno Aquino, Jr. to issue Executive Order No. 79 which, among other things, effectively increased the areas which are not open to mining and imposed a moratorium on the granting of new mining agreements. In 2016, the Philippine Department of Environment and Natural Resources (DENR) declared another moratorium, suspending the processing and approval of all pending exploration permits. President Rodrigo Duterte has, on several occasions, including his recent state of the nation address, expressed the view that the environment must be prioritised as far as the utilisation of mineral resources is concerned.

The negative perception of the effects of mining on the environment also resulted in the former DENR secretary, Regina Lopez, issuing Department Administrative Order No. 2017-10, which imposed a ban on open-pit mining. This issuance has been met with much criticism as it is arguably unconstitutional, since the administrative order is banning a method of extraction that is allowed by law. Further, the DENR secretary is only allowed to issue rules and orders for the regulation of the conservation, management, development and proper use of mineral resources, and does not have the power to prohibit what is allowed by law. In effect, the former secretary unduly amended the law through the administrative order, an act not within the power of a DENR secretary. In fact, the Philippine Mining Industry Coordinating Council (MICC), an inter-agency forum mandated to review all mining-related issuances, has recommended the lifting of the ban on open-pit mining, which was however denied by the president, who is now considering retaining the open-pit ban until 2019.

Nevertheless, recent developments have shown that the Philippine mining industry may have a greater opportunity to contribute to the country’s economic progress. Recently, the DENR lifted the aforementioned 2016 moratorium on the processing and approval of pending exploration permits. According to the current secretary of the DENR, Roy Cimatu, this was in line with the administration’s objectives of increasing market competitiveness, increasing the ease of doing business in the Philippines and attracting local and foreign direct investment.

The government has also begun to crack down on illegal small-scale mining by creating the National Task Force on Mining Challenge (NTFMC), which is tasked with the enforcement of mining and other environmental laws, rules and regulations. Since its formation, the NTFMC has closed a number of illegal small-scale mining operations and gold processing plants in surprise raids.

Further, in an effort to align with the government’s continued focus on ensuring the environmental sustainability of all mining activities in the country, the Chamber of Mines of the Philippines, the country’s association of large-scale miners, recently adopted the Towards Sustainable Mining (TSM) initiative, spearheaded by the Mining Association of Canada, one of the global benchmarks in the extractive mineral industry. The TSM will provide the mining industry “tools and indicators to drive performance and ensure that key mining risks are managed responsibly [in order] to meet society’s needs for minerals, metals and energy products in the most socially, economically and environmentally responsible way”.

Hopefully, the ongoing developments will address the issues plaguing the Philippine mining industry and allow the Philippines to continue pursuing its mining potential to the fullest extent, for the betterment of the national economy and with little to no adverse effect on the environment.

Similar to the mining industry, the Philippine energy sector is now moving toward environmental sustainability by favouring policies and drivers that lead to clean and sustainable energy. While coal is still the leading source of energy in the country, renewable energy sources provide close to a third of its energy mix.

The Philippines’ push toward sustainable energy gained impetus with the passage of the Republic Act No. 9513, otherwise known as the Renewable Energy Act of 2008, which includes income tax holidays and other incentives. This increased the number of investments in renewable energy projects considerably. Since the passage of the law, up to 2016, the number of renewable energy projects already built or being constructed rose from 22 to 406. As an added incentive for prospective investors in renewable energy, the Philippines also established a feed-in-tariff (FIT) programme which essentially operates as a government-provided subsidy for renewable energy generators. The FIT subsidy is, however, passed on to, and ultimately shouldered by, the consumers. Growing concerns regarding the FIT being passed on have led to discussions on possibly reducing the amount to be subsidised through the FIT programme due to how high it raises electricity prices for consumers. Further, in 2017, the Philippine Department of Energy instituted the Green Energy Option Programme, which seeks to empower energy consumers by allowing them to choose renewable energy as their energy source. In addition, the establishment of the Wholesale Electricity Spot Market provides a venue which allows for trading electricity as a commodity.

Nevertheless, despite its passage a decade ago, the Renewable Energy Act has still not been fully implemented. Significantly, the Renewable Energy Market, a market which allows the trading of energy from renewable sources, has not yet been constituted. In addition, the Renewable Energy Trust Fund, a special account in government financial institutions that shall be exclusively used to finance the research, development and promotion of renewable energy systems and resources, is yet to be established as well.

The growth of the Philippine mining and energy sectors may be hampered, however, by possible legislative developments.

For the energy sector, the possible enactment of the second package of the current government’s tax reform programme, the Tax Reform for Acceleration and Inclusion (TRAIN) Act, seeks the removal or reduction of a number of incentives for renewable energy that were established by the Renewable Energy Act.

For the mining sector, a pending bill seeks to require a legislative franchise as a prerequisite to mining operations, among others. There is also a possibility that the ‘Package 2 Plus’ of the TRAIN Act may introduce a comprehensive mining tax, depending on the result of the consultations with the MICC. Further, following the recent increase in the excise tax on mineral products from 2 percent to 4 percent, there have also been proposals to implement a revenue-sharing scheme for mineral production sharing agreements (MPSA). Currently, MPSAs are only subject to an excise tax and royalties if the mine is located in a mineral reservation, with revenue sharing limited to financial or technical assistance agreements (FTAA). If implemented, this will result in effectively treating MPSAs as similar to FTAAs. Under the Philippine constitution and its relevant nationalisation laws, MPSAs may only be granted to corporations with a maximum foreign ownership of 40 percent, while FTAAs may be granted to 100 percent foreign-owned corporations.

While both industries face significant roadblocks which may prevent them from thriving, their potential in the Philippines cannot be discounted. Significant developments continue to spur their growth and provide exciting, albeit challenging, opportunities.

 

Patricia A. O. Bunye is a senior partner at Cruz Marcelo & Tenefrancia. She can be contacted on +632 810 5858 or by email: po.bunye@cruzmarcelo.com.

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BY

Patricia A. O. Bunye

Cruz Marcelo & Tenefrancia

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